Staying short the best strategy
Friday, June 12th 2009, 10:29AM
All the attention on long term home loan rates last week was meaningless. So what if the five-year fixed rate has now hit the 8% mark, which is around its average over recent history?
The reality is that fixing for that length of time at that rate is madness – unless you think it’s a good deal and like to know the certainty of interest rate payments over the next five years.
Currently the best borrowing strategy is clear. Go short (floating or up to 12 months) and stay there.
As our rates table shows six-month rates are the lowest priced option in the market by a considerable margin at present.
The Reserve Bank governor Alan Bollard would like to see them come done some more, but as this earlier post says, the central banks and politicians are impotent on this front.
The stay short strategy makes sense and fits with what the Reserve Bank is saying.
Its clear message at this week’s official cash rate announcement was that we are at the bottom of this interest rate cycle. It’s unlikely rates will go lower, and if they do don’t bet that home loan rates will tumble too.
It’s been a bit of a no brainer what to do, and even what to do in the short term. The tricky part of borrowers is what strategy to adopt when rates start rising.
If you think that Bollard gave a guarantee that short-term rates will stay low till the end on next year – be careful.
Rates will rise and they could rise more quickly than predicted.
When this happens the decisions will be tougher to make.
Prudent borrowers should be considering all the options at the moment and have plans to deal with them in case the unexpected happens.
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